We often familiarize ourselves and associate market regulation as something that is done by government officials and The Federal Reserve. What if I told you there was another way to keep the market regulated but from the other end of things: Triangular arbitrage.
Let me explain: High frequency traders are using this method and type of exploitation of the market by looking at insufficiencies across currencies in the foreign exchange market. They look for prices that are either too high or too low compared to others and act accordingly. While these traders are looking to put money in their pockets and gain a profit, there is a whole other side to this that is benefiting the rest of us.
These traders analyze gaps in the market and jump in immediately. They don’t just take profits by doing this, they actually force the market to correct itself when it is misaligned. They buy assets/currencies that are cheap and sell assets/currencies that are expensive relative to the market. They are actually also pushing prices back to equilibrium, forcing self regulation.
Meanwhile these traders are hunting down inefficiencies in the market, they are also cleaning up the global economy. This method used is very aggressive, meaning that traders need to be quick and right to the point with it, in order for it to be successful. This ensures that the true price of a currency is quickly pushed back to its correct price across the entire market.
Long term effect: Without arbitrage, or in this case triangular arbitrage, market gaps would remain widely open for a longer period of time. This would cause even more of a headache and chaos for investors in the economy.
Next time you think of triangular arbitrage or any type of arbitrage, don’t think of it as just a way for people to short the market and exploit it, but think of it as a way for the foreign exchange market to find balance. So remember that while these traders are hunting for profits, the long term effects without them would be considerably worse.Meanwhile these traders are hunting down inefficiencies in the market, they are also cleaning up the global economy. This method used is very aggressive, meaning that traders need to be quick and right to the point with it, in order for it to be successful. This ensures that the true price of a currency is quickly pushed back to its correct price across the entire market.
Long term effect: Without arbitrage, or in this case triangular arbitrage, market gaps would remain widely open for a longer period of time. This would cause even more of a headache and chaos for investors in the economy.
Next time you think of triangular arbitrage or any type of arbitrage, don’t think of it as just a way for people to short the market and exploit it, but think of it as a way for the foreign exchange market to find balance. So remember that while these traders are hunting for profits, the long term effects without them would be considerably worse.